Poor Forma

Entrepreneur, May, 2002 by Jennifer Pellet

It was bound to happen. After years of a corporate mania for using pro forma earnings to gloss over lackluster financial performance, their rosy glow is waning. In the wake of the Enron debacle, pro forma reporting came under heavy fire from all quarters. Even the Securities and Exchange Commission decried the use of company-issued pro forma reports to inflate earnings figures by excluding multiple "one-time expenses"--a vague term that included anything that management felt fit the bill.

"[Pro forma] became prevalent when companies, particularly new high-tech start-ups, didn't have any earnings or had bad losses and wanted to demonstrate that their operations were better than they appeared to be," explains Ed Jenkins, chairman of the Financial Accounting Standards Board (FASB), a private-sector organization that works with the SEC to establish standards for financial accounting and reporting. "A lot of pro forma earnings were driven by sell-side analysts who were trying to portray a company a certain"

FASB is now developing performance-reporting guidelines. "Companies should explain how they arrive at their pro forma number and reconcile that number back to reported earnings so investors [can decide] whether it makes sense," says Jenkins.

Eventually, FASB hopes to eliminate pro forma reports altogether. "If we do a good job on performance reporting guidelines, there might not be a need for pro farina numbers," says Jenkins, who expects guidelines to be ready by year-end. "Of course, the proof will be what actually happens."